Getting started with acquiring profitable websites - join the journey

This question was asked by Clinton in his comment on the last post about Pawn Stars. Between his further comments and events of the past week, it became apparent what a great post this would make.

Clinton asked "How do we help them rationalize the lower price?"

Later he pointed out "Sellers aren't the best judges of what they're selling"

This point stared me in the face as I was talking to a site owner about a potential purchase.

Please keep in mind, we've been talking for a while and I've dealt with him on other issues in the past. Thus I believe he is being straightforward with me.

In any case, earlier he presented a price he thought was reasonable. After much consideration I was inclined to agree with him - IF certain facts and figures held true. Big IF indeed...

Part of my own reasoning (and concern) was based on how the purchase may affect revenue as current revenue depends largely on his current customer base. We both knew there is a strong possibility I could lose up to half this base - or more - just by buying the business. Ouch. And then, when we last talked, he threw a wrench in the works:

He checked his figures and realized he had overestimated the facts. Even worse it looks like one of the better vendors chose this moment to change how they do things, giving the customer base even more reason to flee.

I asked the owner if these revelations caused him to rethink is selling price. It had. He dropped it nearly in half. I'm not sure it's enough. So what can we learn from this?

Clinton's statement about sellers not being the best judges of what they are selling is true because they tend to base everything on their perception and not on the facts. This tendency presents a huge advantage to us as buyers.

First, I'll suggest not asking for a price right away. Let the owner brag about how great his business is. Listen carefully. Take notes. S/he's loading you up with ammunition you can use later.

Note: the above may sound a bit crass and hard hearted but I don't intend for anyone to do this maliciously. In a big way, you are sharing their hopes, dreams and aspirations. You may have a similar vision for this business so consider if things had gone differently, YOU could be this seller.

Instead of cringing when the seller talks of potential - pay attention. Look for competitors who may have already realized this potential in some way.

Ask about the owner's history and the goals they had when they started.

For goodness sale do NOT challenge anything they say... not yet.

After they've presented this opportunity it all its glory... take some time to absorb and organize what you learned. Form some questions so you can come back to ask them.

Once they've built up their business, you can ask them what price they had in mind. If you can find a price on anything even remotely similar to this site - whether it sold or not - arm yourself with this.

If the buyer refuses to set a price - you can either walk away or make an offer. Since this post is about deflating a price - I'll leave this subject alone.

Obviously there are three basic types of price: Low, In the ballpark ,and High. Again, the first two are beyond the scope of this post.

First of all, I see no reason on earth to respond right away when the seller puts forth a price. If you say anything, then confirm you heard correctly, inquire about any terms this price may include if need be but then say "okay" or "I understand" or something equally non-committal.

If the seller insists on a response to a quoted price, you can always inform him that you are trying to find a way to justify his price. Consider this an opening for the seller to explain his reasoning.

Get him to break the site down into components and place a value on each. Try to get him to be as objective as possible i.e.

"My list of 10,000 subscribers is worth $100,000 because I email them every week with an offer worth $10 in profits. An average of 10% convert every week - for a gross profit of $10,000 per week so the list would be all profit after 10 weeks."

Okay, so how much does it cost you to produce these products? Answer: about $5000.

How loyal are your subscribers? Very.

Since this list is heavily tied to your name - why wouldn't most subscribers leave with you? Oops.

Now what looked like a highly desirable asset is now a potential liability that is a reason to reduce or at least delay part of the purchase price. In addition, the questions asked revealed another flaw because after product costs are calculated the time to recoup the investment has doubled.

Just like when you are buying a used car from a private seller, you want to start looking for flaws that devalue the site.

Chances are the seller has conveniently overlooked some or all of them. For those he's admitted to already, ask him how he would fix those flaws, including any resources he would use and have him estimate how much it would take to fix the flaws.

Many flaws and problems pop up when you start getting actual figures, just like they did with me last week.

This is why you let the owner talk. By getting him to throw caution to the wind and start talking, he's likely to overstate his case and his asking price is based on his perception of how great his business is.

Now reality begins to set in. While you might agree a site with 10,000 visitors a day generating $3500 of profit a month is worth $50,000. But once that 10,000 visitors becomes 8400 and the $3500 per month is more like $2600 on average - the light begins to dim a bit. Factor in 20 hours a month labor and $1000 per month costs and the price should drop even more.

Other factors you can bring up are market conditions, costs you will have to incur that the owner does not and some risks you face that the current owner can ignore.

Keep reminding the seller (and yourself) that your goal is to make a profit and if you can't make a profit than this is not for you. (Back to the Pawn Stars series mentioned in the last post - I'm amazed at how many times the seller caves after the buyer makes this point clear. Time and again, they state this to justify up to 50% or more off the low known value)

These are some of my favorites - what are yours?

Andy